In a follow on measure, Reserve Bank of India has cut the cash reserve ratio (CRR) by 150 basis points to 7.5%. It was only on October 6, that RBI announced a cut in CRR by 50 basis points from 9% to 8.5%. This is a cut of another 100 basis points thereby reducing the CRR from the earlier 9% to 7.5% in total. Combined, the cuts in CRR are expected to release Rs 60,000 crore into the financial system. The measures will be effective from tomorrow, 11th October.
RBI said in its statement – “The Reserve Bank is monitoring developments closely and continuously and would respond swiftly and even preemptively to any adverse external developments impinging on domestic financial stability, price stability and inflation expectations and the continuation of the growth momentum of the Indian economy. The Reserve Bank is committed to maintaining financial stability and active and flexible liquidity management using all policy instruments is an integral part of this objective.”
Easing liquidity and shoring up investor confidence by undertaking such monetary measures has become a worldwide phenomena. Most recently, the central banks of various countries announced reduction in policy interest rates. The Fed released a statement on a coordinated rate cut with other central banks. These measures come as a response to a slowed economic activity as the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
The Ministry of Finance has also announced set up of a Government panel that will review the liquidity situation in the India economy. The group will submit its interim report of the situaton in a duration of one week. Members of the panel will Finance Secretary Arun Ramanathan, members of RBI, chairman of Indian Banking Association and The Finmin has also said corporates want issue of liquidity to be addressed comprehensively. It has also said that it will take more steps as and when required.